The key to understanding cash flow is found in the company’s Balance Sheet. While the Profit & Loss report is super important you also need to pay attention to the Balance Sheet.
If your company is profitable but doesn’t have any cash, check these areas of your Balance Sheet:
- Accounts Receivable – are your customers behind on paying you? Do you have receivables that you have been waiting to collect for a long period of time?
- Fixed Assets – have you been purchasing new equipment? If so, did you pay cash for them?
- Liabilities – Do you have loans, lines of credit or credit cards that you are making payments on to reduce the balance?
- Owner Draw – have you been drawing funds from the company? Are you drawing more funds than profit?
Here’s an example of how the items above can affect your cash flow:
In January, your company made a profit of $5,000. One of the sales you booked was for $3,000 and you have not yet received payment. Your laptop died, so you purchased a new one for $1,000. You have a start-up loan and the monthly payment is $500 plus you paid another $500 on your credit card balance. You drew $1,000 to make your January estimated tax payment. Even though your net profit for January was $5,000, you had negative cash flow of $1,000 ($5,000-$3,000-$1,000-$500-$500-$1,000=-$1,000). As you can see, it is easy to have a profitable company but have no cash.
I recommend that you create and consistently update a forward looking cash projection report. It will give you clear visibility as to your future cash and when you have this visibility you will sleep much better.